Sarah Kim, J.D., LL.M.
4.23.20 | Client Alert – COVID-19 Update
To slow the spread of the COVID-19 virus, state and local governments have imposed “stay at home” orders. As a result, millions of employees who used to commute to a place of work located outside their state of residence are now working from home (“telecommuting”). Conversely, many employers now have employees working from home in states where previously the employer did not maintain any workforce.
Triggering State Tax Nexus
The presence of employees working in a state is one factor that can trigger state tax nexus for the employer. If nexus is triggered, employers may have new filing requirements for various types of state and local taxes such as income tax, sales and use tax, payroll tax, and personal income tax withholding. Accordingly, temporary telecommuting arrangements associated with the COVID-19 outbreak have the potential to increase an employer’s multistate tax and tax compliance burden. Fortunately, several states have taken steps to alleviate the employers’ additional tax burden. The situation is quickly evolving, and the following is only a partial list of states that have taken such steps. We anticipate that many more states will issue guidance.
States Are Issuing Guidance
On March 30, 2020, the New Jersey Division of Taxation announced in a press release that employers will not be deemed to have corporation income tax nexus solely due to the presence of employees working from home due to the COVID-19 crisis.
The Pennsylvania Department of Revenue (“PA DOR”) issued an FAQ (April 3, 2020), which states that the PA DOR will not seek to impose corporate net income tax or sales and use tax nexus solely on the basis of temporary activity including employees telecommuting from their Pennsylvania home. Note the PA DOR policy does not always benefit the employer. The following example regards a Pennsylvania nonresident employee who normally works in Pennsylvania.
Example: If an employee who is not a Pennsylvania resident is working from home temporarily due to the COVID-19 pandemic, the employee’s compensation remains PA source. Therefore, the employer is required to withhold on the compensation.
On April 10, 2020, the Mayor of the District of Columbia issued a notice that the Department of Tax and Revenue will not seek to impose corporation franchise tax or unincorporated business franchise tax nexus solely on the basis of employees or property used to allow employees to work from home (e.g., computers, computer equipment, or similar property) temporarily located in the District during the period of the declared public emergency and public health emergency, including any further extensions by the Mayor.
On the same day, the Indiana Department of Revenue issued an FAQ that they will not use someone’s relocation, that is the direct result of temporary remote work requirements arising from and during the COVID-19 pandemic health crisis, as the basis for establishing Indiana nexus or for exceeding the protections provided by Public Law 86-272 for the employer of the temporary relocated employee. The temporary protections extend to periods of time where:
- There is an official work from home order issued by an applicable federal, state or local government unit, or
- Pursuant to the order of a physician in relation to the COVID-19 outbreak or due to an actual diagnosis of COVID-19, plus 14 days to allow for return to normal work locations.
In an FAQ issued on April 14, 2020, the Minnesota Department of Revenue announced that it will not seek to establish nexus for any business tax solely because an employee is temporarily working from home due to the COVID-19 pandemic.
On the same day, the Comptroller of Maryland issued a notice regarding teleworking and an employer’s requirement to withhold personal income tax on an employee’s Maryland wages. Maryland will consider the temporary nature of a business’s workplace change (i.e. an employee telecommuting due to the COVID-19 emergency) in making a nexus determination for income and withholding tax purposes. The notice includes the following example:
My business is based in Delaware with an office in Maryland. My employee resides in Delaware but generally works in the Maryland office. He is currently teleworking in Maryland. Do I have a Maryland withholding requirement?
Yes. Delaware has not entered into a reciprocal agreement with Maryland. You have a withholding requirement for the wages paid as compensation for services rendered in the Maryland office and those paid for services rendered while teleworking in Maryland.
Note that unlike residents of Delaware, residents of Virginia, Washington D.C., West Virginia, and Pennsylvania who earn compensation for services performed in Maryland are exempt from Maryland state income tax, and therefore, withholding, because Maryland has a reciprocal agreement with these states.
On April 21, 2020, the Massachusetts Department of Revenue issued Emergency Regulation 830 CMR 62.5A.3, which is effective for the period beginning March 10, 2020 and ending on the date on which the Governor gives notice that the state of emergency declared in Executive Order 591 is no longer in effect. The regulation is designed to maintain the pre-COVID-19 status quo with respect to personal income tax and withholding. The regulation provides that:
[A]ll compensation received for personal services performed by a non-resident who, immediately prior to the Massachusetts COVID-19 state of emergency, was an employee engaged in performing such services in Massachusetts, and who during such emergency is performing such services from a location outside Massachusetts due solely to the Massachusetts COVID-19 state of emergency, will continue to be treated as Massachusetts source income subject to personal income tax under M.G.L. c. 62, § 5A and personal income tax withholding pursuant to M.G.L. c. 62B, § 2.
Conversely, the regulation provides that:
A resident employee suddenly working in Massachusetts due to the COVID-19 pandemic who continues to incur an income tax liability in another state due to that state’s sourcing rule will be eligible for a credit for taxes paid to that other state under M.G.L. c. 62, § 6(a). In addition, the employer of such employee is not obligated to withhold Massachusetts income tax to the extent the employer remains required to withhold income tax with respect to the employee in such other state.
For more information, contact Wayne Berkowitz at 212.331.7465 | firstname.lastname@example.org, Richard Goldstein at 212.331.7557 | email@example.com, Sarah Kim at 212.346.6467| firstname.lastname@example.org, or your Berdon LLP Advisor.
For more information on any other matter related to the COVID-19 pandemic, please contact your Berdon advisor and visit Berdon’s COVID-19 Information Center.
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